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Deconstruction vs Demolition Can Generate Big Tax Write Offs

Guest Post by Gary Case
Signature Kitchens Additions & Baths

A typical kitchen, addition or bath remodel begins with two days to a week of tearing out the old and hauling it to the dump. Sometimes that is all you can do with the old, but often the components of a house that are no longer stylish or pleasing to the homeowners are perfectly acceptable to someone else. Deconstruction is an alternative to what we think of as demolition, and preserves the materials intact for charitable donation to organizations like Habitat for Humanity or Community Forklift.

These organizations will provide a receipt for their perceived value which your client can then write off at tax time. The tax deduction is limited to $5,000 because these organizations are not appraisers. So your client might give them what was a $50,000 kitchen in 1995 but only be able to write off up to $5,000 on this typical donation pathway.

If the kitchen is relatively new, with stone counter tops and high-end appliances, your client can easily and quickly reach that $5,000 threshold. To take a deduction of more than $5,000 worth of materials from the renovation project, the donated materials must be appraised by what the IRS refers to as a “qualified appraiser.”

We did a kitchen remodel for Peter and Susan in Bethesda, whose current kitchen was beautiful albeit a bit dated and not able to meet their current needs. They decided to deconstruct and donate the materials from the old kitchen.

The qualified appraisal firm we used on this project was NoVaStar Appraisals located in Virginia. They and similar appraisal companies appraise the old kitchen, bathroom or entire house while in its present state before it is taken apart to arrive at a value of what someone would pay to replace this kitchen or to have a kitchen just like this. NoVaStar came out, took pictures and some measurements. They then sent the Peter and Susan a Charitable Donation Proposal. Part of that proposal was their price to complete the appraisal and provide the documentation.

For this Bethesda kitchen remodel Signature Kitchens Additions & Baths used Community Fork Lift in Hyattsville MD as the nonprofit recipient of the materials and we deconstructed the kitchen for donation. NoVaStar sent a large binder thoroughly identifying (photography) and valuing each part and piece of their donation. In the end, Peter and Susan realized a $34,000 deduction, which covered the extra cost of hiring NoVaStar and the additional day of labor for deconstruction nearly tenfold.

Here's a step-by-step description of how to pursue the tax write-off for this kind of donation. You can also check out our infographic.

Step One
Your client should consult a tax professional to discuss the proposed deduction and to determine if it is right for them to be sure the extra time and effort involved will be worthwhile.

Step Two
Hire an appraisal firm with the proper credentials to perform charitable donation appraisals. The firm has to be able to value used building material. Appraisal organizations provide designations to appraisers interested in deconstruction. This is really the most important part to get right because your client needs a defensible document in case the deduction is ever questioned by the IRS. The IRS requires an appraisal for any donation over $5,000 from a certified appraiser which includes a detailed scope of work and an accurate inventory of the items donated.

Step Three 
Your client cannot donate their kitchen to a neighbor or daughter and expect to get a tax deduction. Choose the tax-exempt charitable organization to receive the donation. They must be a qualified 501(c)(3) charity. Also, it is important to confirm the non-profit has an interest in the materials being donated and the capacity to accept them. Most organizations that accept building material donations provide a free pick-up service. 

Step Four 
Choose a deconstruction company to disassemble the room or house. Do not hire a demolition company. Who could be more qualified to take a kitchen apart than a kitchen design & remodeling company? In other words any company can do the deconstruction provided they have the right attitude. The attitude should be: all that comes out of this kitchen, bathroom or house must come out intact and in good condition for re-installation in someone else’s home. 

Step Five 
The charitable organization documents with the appraisal firm that they have in fact received the kitchen, bathroom or whole house material, and signs the IRS Form 8283, acknowledging receipt of the materials.

Step Six 
The appraisal firm provides the homeowner a signed IRS 8283 form, which they forward to their accountant. To follow IRS guidelines and claim the tax benefits for a large donation the IRS requires a detailed scope of work and an accurate inventory of the items donated. The more thorough and extensive the package, the more defensible the donation will be if the IRS questions the values.

Step Seven 
When the remodel is complete, especially if it’s a new kitchen design, your client can sit back enjoy their new space and smile while contemplating the free lunch they’ll receive in the upcoming tax season.

For More Information:

Signature Kitchens Additions & Baths 301-251-1800
NoVaStar Appraisals 800-870-3965
Community Fork Lift 301-985-5182
Washington Post Article - "Deconstruction can be a tax-savvy alternative to demolition"

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